Daily Insight

Following on from last week, the Dollar was given a temporary reprieve on Friday as the monthly U.S job report showed that the economy added more jobs than expected in August at 128,000 while the unemployment rate fell towards 4.7% from 4.8% in July, suggesting that a strong labour market will sustain consumer spending and spur economic growth in the face of a declining housing market. However, any short-term Dollar gains were limited as the ISM manufacturing index dropped by more than anticipated in August and we closed back above 1.9000 versus the Pound. There is a particularly light calendar this week in terms of economic data released in the States with the focus falling on the Non-manufacturing index, which could point to a further slowdown in the service sector, and the Fed's Beige Book should provide some insights ahead of the next FOMC rate announcement on the 20th September.

The Pound has made significant gains against both the Euro and the Dollar as the market looks for further evidence that the Bank of England will lift UK interest rates above the current 4.75% following the surprise increase last month. The UK economy has expanded at the fastest pace in two years in the second quarter, which has forced the central bank to raise its growth forecast and inflation expectations for 2006. Therefore, the focus this week will fall heavily on the BoE interest rate announcement on Thursday and we expect the monetary policy committee to keep interest rates on hold at 4.75% this month with the minutes of the meeting published on the 20th September. However, it does look increasingly likely that the BoE will raise UK interest rates at least once more before the turn of the year with the market factoring in a good probability that a further 25 basis point increase will take place in November that would push the benchmark interest rate to 5.0%. In terms of economic factors, there is a host of significant data released in the UK this week with industrial production and manufacturing output set to rise by roughly 0.2% in July, while elsewhere, the BRC retail sales survey should provide an indication of the strength of the domestic economy.

The Euro has come under increased pressure against the Pound and continues to trade in a tight range versus the Dollar despite a clear indication from the ECB last week that Euro-zone interest rates are set to rise further next month. The Central Bank elected to hold rates at 3.0% in the monthly announcement last week but the chairman, Jean Claude Trichet, signalled a further tightening of monetary policy in October saying that "strong vigilance" would be needed in the coming months. Historically, this type of language has been used by Trichet as a trigger to the market that interest rates are set to increase the following month but surprisingly, the Euro failed to make any headway against the majors. There is some significant data released this morning in the Euro-zone with the Producer Price Index, which provides a measure of inflation and may show that prices increased by 0.5% in July with the annual rate unchanged at 5.8%.

Data Released 4th September

U.S Market Holiday - Labour Day

EU 09:00 Producer Price Index (July)

written by Adam Solomon